Is action better than inaction? Blockbuster buys Movielink for a song

Blockbuster has finally bought Movielink after tiptoeing around an acquisition …

After a long and tortured courtship, Blockbuster has finally snapped up movie download service Movielink for a relative pittance. Although the purchase price was not disclosed by either of the two companies, the Wall Street Journal has it pegged at less than $20 million.

If accurate, that price is a bitter pill to swallow for the big studios that backed Movielink, given that they reportedly have spent over $100 million for start-up, promotion, and operation costs since the site's launch in 2002. Movielink's lack of success has made Warner Brothers, MGM, Paramount, Universal, and Sony anxious to unload it; Movielink had been on the market for well over a year before today's announcement.

An extended courtship

The latest twists in the saga of Blockbuster and Movielink had the two companies close to a deal as far back as March. In June, however, the CEO of Lionsgate Studios said that his company had inked deals with both Blockbuster and Best Buy for what he called their upcoming movie download services, leaving some to believe that Blockbuster had decided to go in another direction.

Despite the off-again, on-again nature of the Blockbuster-Movielink negotiations, many observers believed that an acquisition was all but inevitable, especially given Netflix's entry into the movie download business earlier this year.

Indeed, Blockbuster and Netflix have been locked in a titanic struggle for the DVD players of America. Netflix's rent-by-mail program has resonated strongly with movie fans, leading Blockbuster to reply with Blockbuster Total Access in the summer of 2004. Despite having a significant retail presence and a very recognizable brand, Blockbuster's service had a hard time gaining traction against Netflix at first.

Hoping to boost its mail-rental fortunes, Blockbuster decided to leverage its brick-and-mortar stores to make an offer Netflix couldn't match: a free in-store rental when mail rentals are returned at a local Blockbuster (although the chain recently put a cap on the number of free rentals per month). Blockbuster's strategy appears finally to be paying off, at least in terms of raw subscriber numbers; last quarter, Blockbuster added 600,000 subscribers. During the same quarter, Netflix reported its first-ever drop of subscribers, with a net loss of 55,000 customers.

Still, the competition remains brutal, and there are many indications that Blockbuster's mail-rental gains are coming primarily at the expense of in-store traffic. In fact, the company has closed five percent of stores in the US so far this year after closing nine percent in 2006.

Cure or placebo?

Movielink is unlikely to cure what ails Blockbuster. The service has proven to be thoroughly unpopular with the movie-viewing public, due in no small part to draconian DRM restrictions and the inability to burn movies to DVD. Last year, the service announced the availability of a download-and-burn service, but actual burnable content has been a long time coming, due to internal squabbles between the five studios that owned Movielink. In contrast, Netflix's service has been more favorably received, although the studios have to be alarmed by this week's news that the DRM on its movie downloads has been cracked.

With the acquisition of Movielink, Blockbuster is finally a player in the movie download scene. Blockbuster also appears to have big plans for the service, with CEO Jim Keyes saying that his company plans to offer downloads to portable devices. "Our acquisition of Movielink, with its associated digital content, is the next logical step in our planned transformation of Blockbuster," said Keyes. "Now, in addition to the entertainment content we provide through our stores and by mail, we have taken an important step toward being able to make movie downloading conveniently available to computers, portable devices and ultimately to the television at home."

Left unmentioned is the fact that downloads offer customers yet another way to cannibalize in-store business. Oh well... at least Movielink came cheap.